Velocity Financial, Inc. Reports First Quarter 2021 Results

WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--May 6, 2021--Velocity Financial, Inc. (NYSE: VEL) (“Velocity” or the “Company”) reported net income of $3.40 million and core income of $6.72 million for 1Q21, compared to $2.58 million and $5.80 million, respectively, in 1Q20. Earnings and core earnings per diluted share were $0.10 and $0.20, respectively, in 1Q21, compared to $0.13 and $0.29, respectively, in 1Q20. Book value per common share was $11.12 as of March 31, 2021, compared to $12.47 as of March 31, 2020.

“As we mark the one-year anniversary of the COVID-19 pandemic, I am increasingly optimistic about the durability of the emerging economic recovery we are seeing as businesses reopen and growth opportunities for Velocity increase,” said Chris Farrar, President and CEO. “First quarter production volumes grew 30 percent quarter-over-quarter, and we continue to build momentum with the introduction of new products and re-launching existing products suspended during the pandemic. These initiatives provide our broker network with an expanded menu of options to satisfy their client’s financing needs, which drives higher production volume and accelerated growth of our loan portfolio. Velocity’s business model and integrated operational platform have shown continued resiliency and the ability to emerge from market dislocations stronger and more profitable than before. I am confident that this will be the case for Velocity going forward.”

First Quarter Operating Results
KEY PERFORMANCE INDICATORS
($ in thousands)		1Q 2021			1Q 2020			$ Variance				% Variance
Pretax income	$	4,604		$	3,727			$	877			24	%
Net income	$	3,396		$	2,579			$	817			32	%
Diluted earnings per share	$	0.10		$	0.13			$	(0.03	)		(22	)%
Core income(1)	$	6,722		$	5,804			$	918			16	%
Core diluted earnings per share(1)	$	0.20		$	0.29			n.a.				(30	)%
Pretax return on equity		8.27	%		6.62	%		n.a.				25	%
Net interest margin - portfolio		4.10	%		4.18	%		n.a.				(2	)%
Net interest margin -total company		2.59	%		2.97	%		n.a.				(13	)%
Average common equity	$	222,810		$	225,125			$	(2,315	)		(1	)%

(1) Core income is a non-GAAP measure. Please see the reconciliation to GAAP net income at the end of this release.

Discussion of results:

• Net income for 1Q21 totaled $3.40 million, an increase from $2.58 million in 1Q20, driven by improved portfolio performance and significantly lower loan loss provisioning in the current quarter
  ‒ Pretax gain on loan sales in 1Q21 totaled $2.8 million (105% of UPB sold)

• Core income for 1Q21 totaled $6.72 million, which reflects the exclusion of $3.33 million as a result of refinancing the Company’s corporate debt during the quarter
• The pretax return on equity was 8.27% in 1Q21, an increase from 6.62% for 1Q20, driven by lower provisioning charges and operating expenses
• Net interest margin - portfolio decreased 8 bps from 4.18% in 1Q20, to 4.10% in 1Q21, driven by growth in nonperforming loans and higher portfolio-related debt costs

TOTAL LOAN PORTFOLIO
($ of UPB in millions)		1Q 2021			1Q 2020			$ Variance				% Variance
Held for Investment
Investor 1-4 Rental	$	985		$	872			$	113			13	%
Mixed Use		275			265				10			4	%
Multi-Family		183			201				(18	)		(9	)%
Retail		178			181				(4	)		(2	)%
All Other		370			384				(14	)		(4	)%
Total	$	1,991		$	1,903			$	88			5	%
Held for Sale
Investor 1-4 Rental	$	-		$	224			$	(224	)		(100	)%
Total Managed Loan Portfolio UPB	$	1,991		$	2,127			$	(136	)		(6	)%
Key loan portfolio metrics:
Total loan count		5,935			6,504
Weighted average loan to value		66.28	%		66.00	%
Weighted average total portfolio yield		8.41	%		8.57	%
Weighted average portfolio debt cost		5.01	%		4.84	%

Discussion of results:

• Velocity’s total loan portfolio totaled $1.99 billion as of March 31, 2021, a 6% decrease from $2.13 billion as of March 31, 2020
  ‒ The Company’s suspended new loan production activities from mid-March to September 2020 because of pandemic-related market disruption

• The weighted average total portfolio yield was 8.41% in 1Q21, a decrease of 16 bps from 1Q20, primarily driven by payoffs of higher-yielding short-term loans and impact of non-accrual loans
• Portfolio related debt cost in 1Q21 increased 17 bps from, driven by higher-cost securitizations issued during the pandemic

LOAN PRODUCTION VOLUMES
($ in millions)		1Q 2021		1Q 2020		$ Variance				% Variance
Total loan production	$	233	$	248		$	(15	)		(6	)%

Discussion of results:

• Loan production totaled $233.0 million in UPB in 1Q21, a 6% decrease from $248 million in UPB from 1Q20
• In April 2021, the Company launched a new Flex I/O short-term loan product and also resumed production of the ARV Pro short-term product, which had been suspended since March 2020

CREDIT PERFORMANCE INDICATORS
($ in thousands)		1Q 2021			1Q 2020			$ Variance				% Variance
Nonperforming loans(1)	$	335,048		$	151,136			$	183,912			122	%
Nonperforming loans % total HFI Loans		16.83	%		7.94	%		n.a.				112	%
Total Charge Offs	$	68.8		$	170.8			$	(102	)		(60	)%
Charge-offs as a % of Nonperforming loans(2)		0.082	%		0.452	%		n.a.				(82	)%
Loan Loss Reserve	$	5,881		$	3,496			$	2,385			68	%

(1) Nonperforming/Nonaccrual loans include loans 90+ days past due, loans in foreclosure, bankruptcy and on nonaccrual.

(2) Annualized

Discussion of results:

• Nonperforming loans as a percentage of the total HFI portfolio were 16.83% compared to 7.94% as of March 31, 2020, primarily driven by pandemic-related economic impacts
• Charge-offs in 1Q21 totaled $68.8 thousand compared to $170.8 thousand in the 1Q20
  ‒ The current quarter’s charge-offs are well below the trailing eight quarter average of $276.0 thousand

• The reserve for loan losses was $5.9 million as of March 31, 2021, compared to $3.5 million as of March 31, 2020
  ‒ Management continues to monitor the impacts of the pandemic on our portfolio and the economic outlook/forecasts

• Capitalized interest on COVID forbearance loans recovered through the end of 1Q21 totaled $0.82 million, with a remaining balance of $7.82 million as of March 31, 2021

NET REVENUES
($ in thousands)		1Q 2021			1Q 2020			$ Variance				% Variance
Interest income	$	40,707		$	44,637			$	(3,930	)		(9	)%
Interest expense - portfolio related		(20,832	)		(22,848	)			2,016			(9	)%
Interest expense - corporate debt		(7,350	)		(6,342	)			(1,008	)		16	%
Net Interest Income	$	12,525		$	15,447			$	(2,922	)		(19	)%
Loan loss provision		(105	)		(1,290	)			1,185			(92	)%
Gain on loan sales		2,839			2,618				221			8	%
Other Operating (loss) income		(38	)		(998	)			960			(96	)%
Total Net Revenues	$	15,221		$	15,777			$	(556	)		(4	)%

Discussion of results:

• Net Revenue decreased 4% year-over-year, driven by growth in nonperforming loans, in addition to costs related to expanding warehouse line capacity and the Company’s corporate debt refinancing
  ‒ Partially offset by a reduction in loan loss provisioning in the current quarter compared to 1Q20

• A decrease in the loan loss provision in 1Q21 reflects the continuation of Velocity’s track record of low charge-offs, as well as improved macroeconomic conditions

OPERATING EXPENSES
($ in thousands)		1Q 2021		1Q 2020		$ Variance				% Variance
Compensation and employee benefits	$	5,186	$	5,041		$	145			3	%
Rent and occupancy		463		455			8			2	%
Loan servicing		1,867		2,239			(372	)		(17	)%
Professional fees		533		1,184			(651	)		(55	)%
Real estate owned, net		509		1,134			(625	)		(55	)%
Other expenses		2,059		1,998			61			3	%
Total expenses	$	10,617	$	12,050		$	(1,433	)		(12	)%

Discussion of results:

• Operating expenses decreased 12% year-over-year driven by reductions in professional fees and real estate owned (REO) expenses
  ‒ 1Q20 professional fees were elevated due to new public company costs
  ‒ REO expenses decreased year-over-year as a result of lower valuation-related expenses and a strengthening real estate market

SECURITIZATIONS
	Securities			Balance at					Balance at
Trusts	Issued			3/31/2021		W.A. Rate			3/31/2020		W.A. Rate
2011-1 Trust	$	61,042		$	-	-			$	-	-
2014-1 Trust		161,076			21,690	7.92	%			28,116	8.04	%
2015-1 Trust		285,457			26,762	6.88	%			47,042	7.85	%
2016-1 Trust		319,809			50,940	8.06	%			73,887	7.20	%
2016-2 Trust		166,853			38,953	7.07	%			55,119	6.09	%
2017-1 Trust		211,910			65,728	5.69	%			97,576	4.77	%
2017-2 Trust		245,601			114,517	3.40	%			152,941	3.51	%
2018-1 Trust		176,816			88,754	4.12	%			125,421	3.96	%
2018-2 Trust		307,988			192,240	4.53	%			227,752	4.42	%
2019-1 Trust		235,580			173,216	4.11	%			207,144	4.03	%
2019-2 Trust		207,020			148,834	3.50	%			191,343	3.41	%
		154,419			122,072	3.29	%			143,048	3.24	%
2020-1 Trust		248,700			208,269	2.84	%			247,293	2.94	%
2020-2 Trust		96,352			106,343	4.54	%
2020-MC1 Trust		179,371			116,241	4.50	%
	$	3,057,994		$	1,474,560				$	1,596,682

Discussion of results:

• Securitization balances as of March 31, 2021, totaled 1.47 billion, down from
  $1.60 billion as of March 31, 2020, driven by normal paydown activity, partially offset by the issuance of the 2020-2 and 2020-MC1 securitizations in June and July 2020, respectively.
• No new securitizations were issued during 1Q21. The Company’s next securitization is on track for issuance in 2Q21

RESOLUTION ACTIVITY
LONG-TERM LOANS
RESOLUTION ACTIVITY		FIRST QUARTER 2021						FIRST QUARTER 2020
($ in thousands)		UPB $		Gain / (Loss) $				UPB $		Gain / (Loss) $
Paid in full		$	15,961	$	795			$	12,928	$	850
Paid current			10,774		62				3,504		101
REO sold			2,754		76				1,091		(293	)
Total resolutions		$	29,489	$	932			$	17,523	$	658
Resolutions as a % of nonperforming UPB					103.2	%					103.8	%
SHORT-TERM AND FORBEARANCE LOANS
RESOLUTION ACTIVITY		FIRST QUARTER 2021						FIRST QUARTER 2020
($ in thousands)		UPB $		Gain / (Loss) $				UPB $		Gain / (Loss) $
Paid in full		$	8,569	$	343			$	-	$	-
Paid current			11,170		40				-		-
REO sold			-		-				-		-
Total resolutions		$	19,739	$	384			$	-	$	-
Resolutions as a % of nonperforming UPB					101.9	%					-
Grand total resolutions		$	49,228	$	1,316			$	17,523	$	658
Grand total resolutions as a % of nonperforming UPB					102.7	%					103.8	%

Discussion of results:

• Strong asset resolution trends continued in 1Q21, with $1.3 million of gains realized on $49.2 million of UPB, compared to $0.66 million and $17.5 million, respectively, in 1Q20.
  ‒ Total resolution gains as a % of UPB resolved were 102.7% in 1Q21, compared to 103.8% in 1Q20

• Resolution activity in 1Q21 has been split between long-term loans and short-term/forbearance loans
  ‒ Short-term loans do not require prepayment fees and result in a lower gain when paid in full, as compared to long-term loans
  ‒ Forbearance loans are loans granted a COVID-19 forbearance that subsequently became nonperforming

• Transaction volumes reflect solid operational execution by Velocity’s in-house Special Servicing team

Webcast Information

Velocity’s executive management team will host a conference call and webcast to review its financial results on Thursday, May 6, 2021, at 2:00 p.m. Pacific Time / 5:00 p.m. Eastern Time.

The conference call will be webcast live in listen-only mode and can be accessed through the Events and Presentations section of Velocity Financial’s Investor Relations website at https://www.velfinance.com/events-and-presentations. To listen to the webcast, please go to Velocity’s website at least 15 minutes before the call to register and to download and install any needed software.

Management’s slide presentation will be available through the Events and Presentations section of the Company’s Investor Relations website after the market close on Thursday, May 6, 2021.

Conference Call Information

To participate by phone, please dial in 15 minutes prior to the start time to allow for wait times to access the conference call. The live conference call will be accessible by dialing 1-866-807-9684 in the U.S. and Canada and 1-412-317-5415 for international callers. Callers should ask to be joined into the Velocity Financial, Inc. earnings call.

A replay of the call will be available through midnight on May 27, 2021, and can be accessed by dialing 1-877-344-7529 in the U.S. and 855-669-9658 in Canada or 1-412-317-0088 internationally. The passcode for the replay is #10154203. The replay will also be available on the Investor Relations section of the Company's website under "Events and Presentations.”

About Velocity Financial, Inc.

Based in Westlake Village, California, Velocity is a vertically integrated real estate finance company that primarily originates and manages investor loans secured by 1-4-unit residential rental and small commercial properties. Velocity originates loans nationwide across an extensive network of independent mortgage brokers built and refined over 16 years.

⁽¹⁾ Core Income and Core EPS are non-GAAP financial measures the Company presents to help investors better understand unique items that impact earnings. For a reconciliation of GAAP Net Income to Core Income, please refer to the sections of this press release titled “Non-GAAP Financial Measures” and “Adjusted Financial Metric Reconciliation to GAAP Net Income.”

Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with United States generally accepted accounting principles (“GAAP”), the Company uses Core Income, which is a non-GAAP financial measure. For more information on Core Income, please refer to the section of this press release below titled “Adjusted Financial Metric Reconciliation to GAAP Net Income” at the end of this press release.

Forward-Looking Statements

Some of the statements contained in this press release may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to anticipated results, expectations, projections, plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, or intentions.

The forward-looking statements contained in this press release reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly from those expressed or contemplated in any forward-looking statement. While forward-looking statements reflect our good faith projections, assumptions, and expectations, they are not guarantees of future results. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes, except as required by applicable law. Factors that could cause our results to differ materially include, but are not limited to, (1) the continued course and severity of the COVID-19 pandemic and its direct and indirect impacts, (2) general economic and real estate market conditions, (3) regulatory and/or legislative changes, (4) our customers' continued interest in loans and doing business with us, (5) market conditions and investor interest in our contemplated securitization and (6) changes in federal government fiscal and monetary policies.

Additional information relating to these and other factors that could cause future results to differ materially from those expressed or contemplated in any forward-looking statements can be found in the section titled ‘‘Risk Factors” in our Form 10-Q filed with the SEC on May 14, 2020, as well as other cautionary statements we make in our current and periodic filings with the SEC. Such filings are available publicly on our Investor Relations web page at www.velfinance.com.

Velocity Financial, Inc.
Consolidated Statements of Financial Condition
	Quarter Ended
	3/31/2021			12/31/2020			9/30/2020			6/30/2020			3/31/2020
	Unaudited			Audited			Unaudited			Unaudited			Unaudited
(In thousands)
Assets
Cash and cash equivalents	$	20,434		$	13,273		$	19,210		$	9,803		$	7,649
Restricted cash		6,808			7,020			7,821			6,735			4,483
Loans held for sale, net		0			13,106			0			212,344			223,123
Loans held for investment, at fair value		1,364			1,539			3,327			2,956			2,987
Loans held for investment		1,983,435			1,924,489			1,977,236			1,836,065			1,895,684
Net deferred loan costs		25,070			23,600			23,850			25,754			26,801
Total loans, net		2,009,869			1,962,734			2,004,413			2,077,119			2,148,595
Accrued interest receivables		11,169			11,373			13,134			17,793			14,470
Receivables due from servicers		77,731			71,044			44,466			36,028			37,884
Other receivables		3,879			4,085			402			4,609			2,516
Real estate owned, net		14,487			15,767			14,653			15,648			16,164
Property and equipment, net		3,891			4,145			4,446			4,718			4,964
Deferred tax asset		9,246			6,654			1,832			5,556			10,111
Other assets		7,325			6,779			16,489			9,042			10,518
Total Assets	$	2,164,839		$	2,102,874		$	2,126,866		$	2,187,051		$	2,257,354
Liabilities and members' equity
Accounts payable and accrued expenses	$	65,003		$	63,361		$	61,859		$	55,938		$	58,591
Secured financing, net		129,666			74,982			74,776			74,571			74,364
Securitizations, net		1,453,386			1,579,019			1,670,930			1,599,719			1,576,432
Warehouse & repurchase facilities		203,314			75,923			19,541			160,796			297,537
Total Liabilities		1,851,369			1,793,285			1,827,106			1,891,024			2,006,924
Mezzanine Equity
Series A Convertible preferred stock		90,000			90,000			90,000			90,000			-
Stockholders' Equity
Stockholders' equity		223,470			219,589			209,760			206,027			250,430
Total Liabilities and members' equity	$	2,164,839		$	2,102,874		$	2,126,866		$	2,187,051		$	2,257,354
Book value per share	$	11.12		$	10.93		$	10.44		$	10.26		$	12.47
Shares outstanding		20,087			20,087			20,087			20,087			20,087

Velocity Financial, Inc. Consolidated Statements of Income (Quarterly)
	Quarter Ended
($ in thousands)	3/31/2021			12/31/2020			9/30/2020			6/30/2020				3/31/2020
	Unaudited			Audited			Unaudited			Unaudited				Unaudited
Revenues
Interest income	$	40,707		$	41,556		$	41,374		$	39,755			$	44,637
Interest expense - portfolio related		20,832			21,442			22,347			21,189				22,848
Net interest income - portfolio related		19,875			20,114			19,027			18,566				21,789
Interest expense - corporate debt		7,350			1,900			1,913			1,894				6,342
Net interest income		12,525			18,214			17,114			16,672				15,447
Provision for loan losses		105			406			1,573			1,800				1,290
Net interest income after provision for loan losses		12,420			17,808			15,541			14,872				14,157
Other operating income (expense)		2,801			4,691			1,349			(1,339	)			1,620
Total net revenues		15,221			22,499			16,890			13,533				15,777
Operating expenses
Compensation and employee benefits		5,186			4,135			5,692			5,863				5,041
Rent and occupancy		463			424			415			448				456
Loan servicing		1,867			1,977			2,168			1,754				2,238
Professional fees		533			1,415			1,051			588				1,184
Real estate owned, net		509			217			898			408				1,134
Other operating expenses		2,059			2,578			1,641			1,847				1,997
Total operating expenses		10,617			10,746			11,865			10,908				12,050
Income before income taxes		4,604			11,753			5,025			2,625				3,727
Income tax expense		1,208			2,177			1,544			484				1,148
Net income	$	3,396		$	9,576		$	3,481		$	2,141			$	2,579
Less Deemed dividends on preferred stock		-			-			-		$	48,955			n.a.
Less; Earnings allocated to participating securities	$	1,281		n.a.			n.a.				-			n.a.
Net income (loss) allocated to common shareholders	$	2,115		$	9,576		$	3,481		$	(46,814	)		$	2,579
Basic earnings (loss) per share	$	0.11		$	0.48		$	0.17		$	(2.33	)		$	0.13
Diluted earnings (loss) per common share	$	0.10		$	0.29		$	0.11		$	(2.33	)		$	0.13
Basic weighted average common shares outstanding		20,087			20,087			20,087			20,087				20,087
Diluted weighted average common shares outstanding		33,407			32,793			32,435			20,087				20,087

Velocity Financial, Inc.
Net Interest Margin ‒ Portfolio Related and Total Company
(Unaudited)
	Quarter Ended March 31, 2021										Quarter Ended December 31, 2020									Quarter Ended March 31, 2020
				Interest			Average							Interest			Average						Interest			Average
	Average			Income /			Yield /				Average			Income /			Yield /			Average			Income /			Yield /
($ in thousands)	Balance			Expense			Rate(1)				Balance			Expense			Rate(1)			Balance			Expense			Rate(1)
Loan portfolio:
Loans held for sale	$	8,904									$	20,719								$	202,474
Loans held for investment		1,927,760										1,958,436									1,881,308
Total loans	$	1,936,664		$	40,707		8.41	%	(4	)	$	1,979,155		$	41,557		8.40	%		$	2,083,783		$	44,637		8.57	%
Debt:
Warehouse and repurchase facilities	$	113,528			1,705		6.01	%			$	60,065			717		4.78	%			347,350			4,301		4.95	%
Securitizations		1,548,642			19,127		4.94	%				1,666,180			20,726		4.98	%			1,542,318			18,547		4.81	%
Total debt - portfolio related		1,662,170			20,832		5.01	%				1,726,245			21,443		4.98	%			1,889,668			22,848		4.84	%
Corporate debt		108,365			7,350		27.13	%	(5	)		78,000			1,900		9.74	%			94,468			6,342		26.85	%	(6	)
Total debt	$	1,770,535		$	28,182		6.37	%			$	1,804,245		$	23,343		5.18	%			1,984,136			29,190		5.88	%
Net interest spread - portfolio related (2)							3.39	%									3.43	%								3.73	%
Net interest margin - portfolio related							4.10	%									4.07	%								4.18	%
Net interest spread - total company (3)							2.04	%	(5	)							3.22	%								2.68	%	(6	)
Net interest margin - total company							2.59	%	(5	)							3.68	%								2.97	%	(6	)

(1)	Annualized.
(2)	Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.
(3)	Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.
(4)	The debt issuance cost amortization was higher for the three months ended March 31, 2021, as a result of a lower average outstanding borrowing balance from a new financing facility.
(5)	Excluding the one-time debt issuance cost write-off of $2.9 million and prepayment penalties of $1.6 million associated with the $78.0 million payoff of our corporate debt in February 2021, the corporate debt average rate would have been 10.49%; net interest spread — total company would have been 3.06%; and net interest margin — total company would have been 3.52% for the three months ended March 31, 2021.
(6)	Excluding the one-time debt issuance costs write-off of $3.5 million and prepayment penalties of $0.3 million associated with the $75.0 million paydown of our corporate debt in January 2020, the corporate debt average rate would have been 10.88%; net interest spread — total company would have been 3.44%; and net interest margin — total company would have been 3.69% for the three months ended March 31, 2020.

Velocity Financial, Inc.
Adjusted Financial Metric Reconciliation to GAAP Net Income
(Unaudited)`
Core Income
	Quarter Ended
($ in thousands)	3/31/2021			12/31/2020			9/30/2020			6/30/2020			3/31/2020
Net Income	$	3,396		$	9,576		$	3,481		$	2,141		$	2,579
Nonrecurring debt amortization		3,326			-			-			-			2,610
COVID-19 Impact		-			-			-			1,267			615
Workforce reduction costs		-			-			432			-			-
Core Income	$	6,722		$	9,576		$	3,913		$	3,408		$	5,804
Core diluted earnings per share	$	0.20		$	0.29		$	0.12		$	0.17		$	0.29